A common assumption when thinking about retirement is “I’ll just take my pension when I need it.” This sounds reasonable; your pension exists for that. But in practice, how your income is structured is more complex, and it can make a big difference between a stressful or worry-free retirement.
Most people have more than one source of income: State Pension, personal/workplace pension, ISA/other investment or cash savings. These different “pots” are taxed in different ways.
The State Pension is taxable but paid without a tax deduction; pension withdrawals are partly taxable; ISA withdrawals are tax-free, and even cash savings generate taxable “income”. Each is manageable on its own, but together they can create complexity and inefficiencies, with more tax payable than necessary, leaving less available for your retirement and more to worry about. Over time, the tax effects can build up, and you need to find more from capital to receive the same amount after tax.
Retirement planning tends to follow one key theme: taking the right money in the right order at the right time.
There is no one-size-fits-all answer. The right combination is dictated by what you want and what you need, and even by what you may want or need in the future, including any tax-efficient eventual legacy for the next generation.
Timing is more important than most people think it is.
Unlike working life, where income falls into a regular and predictable pattern, you are in full control of retirement “income” and therefore need to think about it carefully. Taking too much from a pot in a certain year can increase your tax bill, reduce how long your capital will last, or even create an inefficient surplus building up in cash savings that you do not need.
You should also think about how you access your personal/workplace pension:
- Are you making the most of tax allowances?
- Do you need to think about using some of your pension to buy a guaranteed income, known as an annuity?
- How much can you afford to keep invested, and at what level of risk/return?
A well-structured retirement often uses combinations of pots and allowances for maximum efficiency. Making the most of these helps capital last.
Retirement can be made more difficult due to big “mistakes”, but more often it is a gradual drift off course that does the most damage; for example, taking slightly more income than needed and/or ignoring thresholds and allowances.
A simple, repeatable plan kept under regular review supports investment growth for a sustainable retirement over the long term.
All this is core to financial advice. Your most important decisions should be about how you want to spend your retirement and finding the right professional advice to help you do so.
